Global Markets

While stocks ended the week on an upbeat note, the news for Greece continued to deteriorate as the credit rating agency Fitch cut its rating for Greece by two notches to the lowest investment-grade rating — to triple-B-minus from triple-B-plus — and said the outlook remained negative. Yields on Greek debt soared as worries continue to escalate about the country’s ability to finance its heavy debt load. Some analysts are saying that the likelihood of the country needing to accept aid from the EU and IMF is growing. EU officials said they are ready to rescue Greece if needed and economists said that a bailout may be imminent. The EU is “ready to intervene,” according to EU President Herman Van Rompuy.

The Eurozone's continuing fiscal woes combined with uncertainty over the speed of U.S. monetary tightening provided investors with an excuse to sell riskier assets on Thursday. Traders took note of the European Central Bank and the Bank of England’s policy decisions — neither altered its main rate. However, the ECB reiterated it would extend the relaxed rules for accepting Greek debt as collateral — a confirmation that will be welcomed in Greece where the position of the banking system appears increasingly precarious. Though apparently contained, the Greek crisis clearly still has the capacity to rattle investors.

Traders are also increasingly sensitive to the prospects of a shift in U.S. monetary policy. The decline in U.S. stocks on Wednesday was partly blamed on some forceful comments from Kansas City Fed President Thomas Hoenig. Mr Hoenig said he thought the Fed should consider raising policy rates soon in order to prevent asset bubbles. He suggested a move to 1 percent from the current zero to 0.25 percent range. Around the same time, however, Fed Chairman Ben Bernanke was playing down the improvement in the U.S. labor market and stuck a generally downbeat tone.

On the week, all indexes followed here were up except the SET, KLCI, Nikkei and Shanghai Composite. Gains ranged from 3.1 percent for the Hang Seng and 3 percent for the PSEi to 0.2 percent for the DAX and S&P/TSX Composite.

Global Stock Market Recap

Europe and the UK

The FTSE, DAX and CAC were up last week despite tumbling on Wednesday and Thursday amid escalating risks of a Greek default. But shares rebounded after the German finance ministry said the financial safety net for Greece agreed to late last month remains in place and that Athens has not asked to make use of the facility. The Ministry added that no one should doubt that the eurozone and the International Monetary Fund will help Athens if needed.

And in an interview on Friday, ECB President Jean Claude Trichet reiterated comments made in a Thursday news conference, saying that Greece was not at the stage where it needed a financial bail-out and was in no danger of defaulting.

In the UK, there was little reaction after Prime Minister Gordon Brown dissolved the government and called a general election for May 6.

Bank of England — no change

As universally expected, the Bank of England’s monetary policy committee voted to keep its policy interest rate at the current record low of 0.5 percent and to hold off on any further efforts to boost demand through its £200 billion quantitative easing program. Analysts expect the MPC to remain in a wait and see mode for months ahead. Economic data have been decidedly mixed in the first quarter although there is uncertainty about whether that weakness is structural or whether it reflects a temporary setback in the face of unusually harsh weather in the first few weeks of this year. Recent data from the housing market and closely watched surveys of purchasing managers suggest that activity has bounced back. And stronger-than-expected industrial production data have countered concerns that Britain could be facing a “double-dip” recession. But concerns remain that recovery, while real, might be fragile. Credit conditions remain constrained for households and businesses in spite of record low interest rates.

The BoE confirmed that it would delay its May monetary policy decision from Thursday, May 6 until Monday, May 10 due to the General Election. UK Prime Minister Gordon Brown announced Tuesday that the General Election would be held on Thursday, May 6. Under the BoE’s pre-announced rules, Monetary Policy Committee meetings are delayed if they clash with national elections.

European Central Bank — focus on Greek debt

As expected, the European Central Bank left its key policy interest rate at 1 percent where it has been since May 2009. The economy remains soft overall and EMU data are disappointing. Retail sales continue to decline while German manufacturing orders and industrial production data were unchanged in the latest month.

But the ECB is concerned about the growing deficits and debt of EMU member states which threaten the anemic recovery and restrain monetary policy. And despite rising commodity prices and inflation, the ECB remains sanguine about price stability. Along with lackluster consumer spending due to high unemployment, fiscal problems will probably complicate the ECB's return to normal monetary policy. Meanwhile the weaker euro, which has fallen more than 6 percent on a trade-weighted basis since early December, has, in effect, loosened monetary policy still further.

The main focus of ECB President Jean-Claude Trichet is the financial crisis in Greece. The Bank sent a signal of support to Greece saying that Athens would not be allowed to default and that a European commitment of support should be taken seriously by investors. At the same time, the Bank provided details on changes that it would make beginning next year to tighten its refinancing operations. But the statements failed to provide relief to Greek and European assets, which have been punished recently by investors who are not yet convinced by the pledges of support for Athens.

Asia/Pacific

Most equity indexes within this region were up last week save the Nikkei, Shanghai Composite and SET. The Thai index, down 1.4 percent on the week, was affected by political unrest in the country which dragged stocks down especially on Thursday. Both the Nikkei and Shanghai were down less than 1 percent. On Friday, most of the indexes polished the week off with a positive performance as positive retail sales in the U.S. and strong earnings helped offset continuing concerns over Greece’s sovereign debt. Easing of the debt crisis in Greece following the ECB chairman's assurance also lifted market sentiment across the region. Rising expectations of a change in the Chinese government’s currency policy also helped some sectors higher.

Economic data during the week were light. In Japan, machine orders disappointed again — they dropped 5.4 percent on the month and 7.1 percent on the year. And in Australia, the unemployment rate remained unchanged at 5.3 percent while employment continued its climb. The Australian economy has added 214,900 jobs since September 2009.

Reserve Bank of Australia — cash rate up again

At its meeting today, the Reserve Bank of Australia’s board once again increased its key cash rate by 25 basis points to 4.25 percent. Analysts had been split on whether it would raise interest rates for the fifth time in six meetings.

In recent comments, RBA governor Glenn Stevens opined that house prices were getting too high and it was important for interest rates to return to more normal levels. However, recent economic data have suggested that first quarter growth has weakened now that government stimulus has waned. Both building approvals and retail sales tumbled in February indicating that the domestic economy is cooling after the four interest rate increases since October. However house prices have been rising at an estimated 1 percent per month making housing here one of the most expensive in the world. Yet at the same time the manufacturing PMI dropped to 50.2 and barely above the break even level.

In an upbeat assessment of the country’s outlook, the RBA indicated they expected 2010 growth to be around a trend of 3.25 to 3.5 percent and inflation during the same period would be close to its 2 to 3 percent target range. Many economists expect Australia’s interest rate to reach 5 percent by the end of 2010 and 5.5 percent in the second half of 2011.

Bank of Japan — on hold pending semi-annual outlook

As universally expected, the Bank of Japan left its monetary policy unchanged. The policy interest rate remains at 0.1 percent where it has been since December 2008. The vote was unanimous. As expected, the monetary policy board raised its economic assessment after the Tankan showed that the export driven recovery is gaining momentum. However the MPB said that momentum for a self sustaining recovery remained weak. After increasing its special three-month 0.1 percent loan program to Y20 billion last month, the MPB left it unchanged this time. It is only three weeks since the previous meeting and obviously too soon to make any further move. But the BoJ could be under pressure to spur the economy ahead of a July election.

The latest Tankan survey showed that sentiment improved for the fourth quarter in a row. Large manufacturers were the least pessimistic since September 2008, the month when Lehman Brothers collapsed and intensified the world financial crisis. Big firms said they expect profits to grow and reported lower excesses of production capacity and workers.

The MPB meets again in three weeks when it will issue its semi-annual Outlook Report which includes the board's forecasts for economic growth and inflation through fiscal 2011.

Currencies

The yen was up while the euro declined against the U.S. dollar last week. The euro, which rebounded on Friday, was beset by mediocre economic data combined with worries about Greece’s fiscal problems. The euro steadied as reassurances from the ECB and EU that Greece would not default.

The yen advanced on speculation that China is preparing to revise its currency policy. Reports suggested that China, which has effectively pegged the renminbi to the dollar since July 2008, would allow greater variation in the value of its currency combined with a small but immediate rise in its value against the dollar. According to analysts, currencies of countries that were dependant on China as an export market were likely to benefit most from a revaluation of the renminbi, making the Australian dollar and the yen the best-positioned currencies.

The renminbi saga

According to analysts, China has begun to prepare the ground publicly for a shift in exchange rate policy. This comes just a few days after the U.S. Treasury said it would postpone a decision on whether to name China a “currency manipulator.” A senior government economist told reporters in Beijing on Tuesday that China could widen the daily trading band for the renminbi and allow it to resume the gradual appreciation it halted in July 2008 in response to the global credit crisis.

The Chinese foreign ministry said the country would adhere to three principles on currency policy — any change must be controlled, it must be Beijing’s own initiative and any shift must be gradual. Despite repeated official assertions that the renminbi is not undervalued, most Chinese economists and economic officials acknowledge it is likely to strengthen over the long term.

Canadian dollar parity

The Canadian dollar rose to parity with the U.S. dollar for the first time in nearly two-and-a-half years in intra-day trading. Adding support for the Canadian dollar was increasing expectations that the Bank of Canada would join other central banks from commodity producing nations and start to raise interest rates from their current ultra low levels and normalize monetary policy.

Economic fundamentals are better than anticipated with inflation firmer and positive job growth. And overall growth is running well above expectations while Canadian sovereign risk is low.

Selected currencies — weekly results

Indicator scoreboard

EMU

Fourth quarter final gross domestic product was revised lower to unchanged on the quarter and down 2.2 percent on the year. The main revision to domestic demand was in fixed investment which was adjusted from a 0.8 percent quarterly decline to a steeper 1.3 percent drop. Both household consumption (0.0 percent) and government current spending (down 0.1 percent) were unrevised but a larger revision to imports than exports saw net foreign trade add a smaller 0.2 percentage points to the bottom line. Business inventories contributed 0.1 percentage points to quarterly growth, up from a flat estimate last time.

February producer price index (excluding construction) edged up a slightly smaller than expected 0.1 percent and was down 0.6 percent on the year. All of the main sectors outside of intermediates (up 0.3 percent) saw prices advance just 0.1 percent on the month. Accordingly, the excluding energy index also crept 0.1 percent higher. Regionally, the PPI was down 0.2 percent on the month in Germany and but was up 0.1 percent in Italy, 0.2 percent in France and 0.6 percent in Spain. The only other declines were registered in Cyprus (down 0.2 percent) and Slovakia (down 1.7 percent). The steepest gain was in the Netherlands (up 0.9 percent).

February retail sales declined 0.6 percent and were down 1.1 percent on the year. Average sales for the first two months of the year were 0.1 percent below their fourth quarter mean. Excluding food, drink & petrol where demand slumped 1.6 percent from January, purchases actually edged up 0.2 percent. Total sales were dragged lower on the month by weakness in Germany (down 0.4 percent), Portugal (down 3.4 percent), Slovenia (down 1.7 percent) and Slovakia (down 1.5 percent). However, demand rose in France (0.6 percent) and in Spain (0.5 percent).

Germany

February manufacturing orders were unchanged on the month and were up 24.5 percent on the year. Orders in consumer & durable goods plunged 5.6 percent while capital goods slipped 0.6 percent on the month. Domestic orders dropped 1.9 percent, reflecting a 6.4 percent slide in consumer & durables and 4.3 percent drop in capital goods. Orders for basics rose 1.4 percent. By contrast total foreign orders climbed 1.8 percent on the month, largely thanks to the non-EMU bloc which posted a 2.9 percent advance. Demand from other EMU states edged up just 0.1 percent, within which consumer & durables fairly collapsed, down 8.0 percent. EMU capital goods orders rose 1.4 percent while basics were up 0.5 percent.

February industrial production was unchanged on the month and was up 5.8 percent when compared with last year. January’s previously reported 0.6 percent monthly gain was revised to just 0.1 percent. Industrial sector activity was hit by the bad weather. Weakness was especially marked in consumer goods where durable production slumped 2.6 percent on the month and nondurables sank 2.3 percent. Energy output was down 1.7 percent while intermediates edged 0.1 percent lower. However capital goods rebounded 1.5 percent after dropping 1.7 percent in January.

February merchandise trade surplus climbed to €12.1 billion from €8.7B surplus at the start of the year. The improvement was due to a 5.1 percent monthly rebound in exports after a 6.5 percent drop in January. Imports edged up just 0.2 percent but this was on top of a hefty 5.6 percent jump at the start of the year. Annual growth in exports recovered to 9.6 percent, mainly thanks to a 13.7 percent gain in purchases from non-EU countries while imports were up 4.2 percent on the back of a 12.8 percent increase in inflows from EU countries outside of the EMU bloc.

France

February merchandise trade deficit was €3.60 billion and was slightly higher than January’s revised deficit of revised €3.53 billion. Exports were up 0.6 percent while imports were up 0.8 percent. On the year, exports were up 6.5 percent while imports were up 1.4 percent.

February industrial production was unchanged on the month and up 3.3 percent on the year. The key manufacturing sector outpaced overall industry with a 0.4 percent monthly gain. The strongest sub-sector was refining where activity surged 16.5 percent but there were advances too in both electronics & machines (0.5 percent) and other manufactured goods (1.0 percent). By contrast, output in the transport category dropped 3.6 percent. Energy contracted 2.6 percent on the month while construction was down 0.6 percent.

United Kingdom

February industrial production was up 1.0 percent and was down 0.1 percent when compared with last year. Total output was restricted by declines in its two highly erratic sectors — mining and quarrying output dropped 0.1 percent while the oil and gas extraction area contracted by 1.1 percent. Manufacturing output was up 1.3 percent and 1.5 percent on the year. Eleven of the 13 reporting sub-sectors saw production levels increase on the month within which electrical & optical equipment (3.2 percent) and non-metallic minerals (9.2 percent) fared particularly well.

March output prices were up 0.9 percent on the month while input prices soared 3.6 percent. Output prices were up 5.0 percent while input prices jumped a hefty 10.1 percent on the year. Petroleum products jumped 3.9 percent and alone added 0.4 percentage points to overall factory gate prices but there were sizeable increases too in chemical products (1.4 percent), electrical & optical goods (0.9 percent) and in the other products area (1.2 percent). The only sector seeing lower prices was food (down 0.3 percent). Meanwhile the monthly leap in input costs was driven in no small way by the exchange rate. In addition to a near-10 percent spurt in crude oil prices, imported metals were up 5.3 percent, imported parts & equipment were up 2.7 percent, imported food materials advanced 2.1 percent and other imported materials climbed 3.0 percent. Significantly, home food materials rose a much more modest 1.1 percent and other home produced materials edged just 0.1 percent higher.

Asia/Pacific

Australia

March unemployment rate remained at 5.3 percent for the second month. However, employment increased by a less than expected 19,600 — analysts had expected an increase of 30,000. The increase in full time employment of 30,100 more than offset the decline in part time employment by 10,600. The number of unemployment edged up by 4,200 to 619,100. The number of persons looking for full-time work decreased by 3,800 to 442,000 and the number of persons looking for part-time work increased 8,000 to 177,100. The participation rate edged down to 65.1 percent from 65.2 percent in February.

Americas

Canada

March employment improved and added 17,900 new jobs while the unemployment rate remained at 8.2 percent for the second month. The employment breakdown makes for mixed reading. On the downside, all of the net job creation occurred in part-time positions which were up by a solid 32,200. By contrast, full-time employment dropped by 14,200. However the private sector saw its headcount increase by 42,400 while public sector employment contracted 20,600. All of the headline gain in jobs took place in the goods producing sector. Within the 39,800 new positions created here, manufacturing was somewhat disappointing, up just 3,900, but construction performed strongly, posting a 21,000 advance. Natural resources added 13,200 while agriculture and utilities were little changed. Service sector payrolls dropped 21,900, mainly on the back of sizeable declines in business, building & other support services (26,300), transportation & warehousing (19,600) and the other services category (30,000). Declines here were more than enough to offset gains in retail (13,700), professional, scientific & technical services (38,400) and education (6,200).

Bottom line

The Greek tragedy continues. Worries about Greece’s fiscal situation continued to alternately wax and wane last week — and the problem and how to solve it will not go away soon. The weekend remains a favored time for any announcement of a Greek rescue deal.

What was lacking in U.S. economic data last week will be more than made up in this week! A plethora of key economic data ranging from international trade to retail sales and housing starts are just a few. And first quarter earnings season begins!

Looking Ahead: April 12 through April 16, 2010

Anne D Picker is the author of International Economic Indicators and Central Banks.